Company Perspectives:

Allied Products Corporation's primary business operations consist of three divisions, each of which holds a leadership position in its field in terms of market share and product technology. Our Bush Hog division manufactures and markets equipment for agriculture and for landscape and golf course maintenance. Our Verson division builds and services large mechanical and hydraulic presses used to form metal parts. Our Coz division develops sophisticated thermoplastic compounds and creates additives used to add color and other useful properties to thermoplastics.

Company History:

Allied Products Corporation is a manufacturing company with a long history of producing diverse products for industrial applications, primarily for the automobile industry. Allied has gone through many incarnations over its 70-year history, but in the mid-1990s the company operated three divisions: Bush Hog, a leading manufacturer of farm implements; Verson, a technologically advanced maker of large metal forming presses; and Coz, a compounder of thermoplastic resins.

Company Origins and Growth through the 1950s

Allied Products was formed in Michigan in 1928 by the merger of the Victor Peninsular Company, Richard Brothers Die Works and the Indiana Lamp Corporation. At the time, all three companies supplied the burgeoning U.S. automobile industry: Victor Peninsular produced cap screws and cold forged parts; Richard Brothers Die Works manufactured dies used to form steel automobile components; and Indiana Lamp supplied the electric headlights of the early mass-produced automobiles. In its first year of operation Allied Products netted $794,000, a figure that was not matched until the mid-1940s.

Nineteen twenty-eight was not an auspicious year in which to start a business. The stock market crash of 1929 and subsequent depression affected all American business, but the growing auto industry was relatively unscathed and was one of the primary leaders of the financial recovery. After posting four years of losses during the early 1930s, Allied returned to profitability in 1934 and remained in the black for the next 25 years. As the automobile industry prospered, Allied also grew, with sales reaching $8 million by 1949. In 1951 Allied acquired the Michigan Powdered Metal Products Co., adding ground metal parts for automobiles and aircraft to the company's line of products. By the mid-1950s the company was operating eight manufacturing plants in Michigan and netting about $1 million annually. When the auto industry slumped in the late 1950s, Allied began to look for other sources of revenue. The company had been producing various types of metal fasteners for industrial use for years but now stepped up their presence in this market by acquiring in a reverse merger the assets of Pheoll Manufacturing Co., one of the leaders in the metal fastener industry.

New Ownership and Diversification in the 1960s

The nature of Allied Products took an abrupt turn in 1961 when the company was acquired by a group of investors led by Jay Pritzker and Saul Sherman. As recounted in a profile in Forbes, a series of mergers had left Allied with a host of financial partners, and Pritzker and Sherman decided to cut cards to determine who would keep the small manufacturer. Sherman won the cut, and in 1965 he and his partner, Lloyd Drexler, took over management of the firm. Sherman, an ex-quarterback for the Chicago Bears, and Drexler, a former professor of economics, decided to use Allied as the base for a manufacturing conglomerate.

By 1970, Allied had become a true conglomerate with an interest in industrial fasteners, automotive dies and stampings, textiles, chemicals, farm implements and construction materials. Sales tripled from $71 million in 1966 to $222 million in 1969. However, high interest payments on the debt incurred from the spate of acquisitions and poor performance by some of the newly acquired companies put a damper on earnings, which failed to keep pace with sales. After four years of slow earnings growth, in 1970 net income actually fell to a dismal $1.3 million, well below levels recorded in the early 1960s before the period of rapid expansion. Allied president Saul Sherman remained optimistic about the path his management team had chosen. "We knew there were problems with some of the acquisitions but we wanted to take a giant leap forward," Sherman said in a 1973 interview with Investor's Reader. "We figured we could solve the problems and come out a larger company with grow power."

Allied moved to solve these problems by selling some of the operations in the soft construction and textile sectors and using the funds generated to reduce debt. With interest expenses cut in half, earnings rose, but the difficulties stemming from the rapid, somewhat haphazard expansion of the company were far from over. In spite of these difficulties, Allied management was determined to adhere to the company's expansion plans. The agricultural equipment sector looked particularly attractive to company executives from the vantage of the early 1970s. The worldwide demand for food appeared insatiable, and millions of additional acres were being put into production across the United States. Through the company's Bush Hog division, Allied produced such relatively simple farm equipment as rotary cutters, shredders, spreaders and mulchers. Unlike tractors and other large agricultural machinery, these "short-line" implements required comparatively little investment on the part of farmers and were therefore less subject to the cyclical swings of the agricultural market. During 1973 alone, Allied acquired six agricultural machinery manufacturers: Standard Engineering Co., Kraus Manufacturing and Equipment Co., Industrial Scientific Co., Brewton Iron Works, Inc. and Gin Equipment, Inc. At the same time the company embarked on a multimillion dollar expansion plan for the company's Bush Hog division that would increase production space and update machinery. By the end of that year the agricultural implements sector became Allied's largest income generator, accounting for 23 percent of the company's sales and 31 percent of profits.

Rising interest rates during the early 1970s threatened to put a halt to Allied's expansion plans. The company already carried a sizable debt load from the 1960s and could ill afford to take on high interest financing. By negotiating a series of tax-exempt industrial revenue bonds, then vice-president Richard Drexler, son of president and CEO Lloyd Drexler, undertook some creative financing to allow the company to continue its expansion without taking on a crippling debt burden. Tax-exempt revenue bonds had been introduced during the 1960s to encourage companies to invest in depressed areas by allowing municipalities and states to sell tax-exempt bonds to finance private industrial development. In 1969 the federal government placed a limit of $5 million on these issues, effectively preventing their use for large-scale borrowing. Undeterred, Richard Drexler and Allied's general counsel, Kenneth B. Light, set out to convince the small southern municipalities in which the company's newly acquired agricultural implement plants were located to finance Allied through the tax-exempt bonds. "A lot of the secret in this type of financing is initiating and maintaining a relationship with a municipality, Drexler told Business Week in 1975. "Once they get acquainted with the company, they get excited about having us and our new jobs there." By putting together a series of these bonds with a variety of local governments, Allied was able to finance the company's $38 million expansion of its agricultural equipment business at lower, tax-exempt rates.

By the mid-1970s Allied's determination to expand through acquisitions once again landed the firm in financial difficulties. In 1975 and 1976 the company posted two consecutive net losses of over $1 million in spite of increases in overall sales. Most of these losses could be attributed to Allied's textile and soft goods operations, which were losing business to foreign manufacturers at an alarming rate. Allied responded by closing two cotton mills but did not undertake any major restructuring of the textile business. Instead, the company further expanded its profitable agricultural equipment group by acquiring five more farm implement manufacturers. By the end of the decade Allied was operating 23 subsidiaries and divisions divided into three major product groups: agricultural equipment, industrial components (including fastening systems, industrial machinery, automotive stampings, electrical insulation and chemicals) and FabricsAmerica. Sales had doubled over the course of the decade to $332 million, but, at $3.1 million, net income was identical to 1971 levels.

New Leadership and Restructuring in the 1980s

Allied's lackluster performance of the late 1970s turned into a crisis in the early 1980s as overdiversification, depressed auto and agricultural industries, and an increase in foreign competition crippled sales and plunged the marginally profitable company into red ink. By 1984 Allied had posted three consecutive years of losses totalling more than $11 million. It became clear that the company could no longer be patched up in bits and pieces, and in 1982 Lloyd Drexler and Saul Sherman, who had managed the company for nearly 20 years, stepped aside in favor of Lloyd's son Richard Drexler. "I was the man for the time," the younger Drexler told Business Week in 1986. "I had no emotional attachment. I wasn't going to let anybody stand in my way."

True to his word, the new Allied president moved quickly to cut costs and shed unprofitable divisions. Within two years Richard Drexler had sold or liquidated 27 manufacturing units, reducing employment by 60 percent. Administrative and sales staff were forced to accept huge salary cuts in exchange for stock options and higher commissions. Manufacturing was transferred to rural facilities where employment costs were lowest, and the threat of closures persuaded workers to accept drastic wage cuts. By 1987, Industry Week estimated that Allied's labor costs were up to 50 percent below its competitors'.

While the key to Drexler's recovery plan was to cut costs, the 39-year-old company president also implemented a new program of acquisitions. The early to mid-1980s were lean years for the agricultural industry. A combination of poor weather conditions and a volatile world market created one of the worst agricultural markets in 50 years. Saddled by debt, farmers were unable to invest in new machinery, and the agricultural equipment industry suffered record losses. Drexler felt confident that these depressed conditions would improve by the end of the decade and was determined to take advantage of the bargains available in the form of struggling companies. Allied acquired four agricultural implement makers (Kewanee Farm Equipment Co., New Idea Farm Equipment Co., White Farm Equipment Co., Lilliston Corp.) in the mid-1980s, all at prices well below book value. By shifting production to other Allied factories with low labor costs, Drexler was able to lower prices on the companies' diverse lines of farm implements and thereby increase market share. During the same period Allied also expanded its automotive business with the purchase of Verson Allsteel Press Co., a maker of large presses used to produce stampings for the automotive industry. Verson received the same treatment as the farm equipment makers with labor costs slashed and production transferred to other Allied facilities.

Crash and Recovery in the 1990s

When Allied emerged from restructuring, the company operated 14 divisions and subsidiaries organized into three product groups: the Agricultural Equipment Group (accounting for 48 percent of sales and 78 percent of earnings), the Transportation/Industrial Products Group (47 percent of sales and 17 percent of earnings) and the Materials Technology Group (five percent of sales and earnings.) Drexler's recovery plan was an initial success. In 1986 sales rose to $420 million, and net income reached a record $15 million. Analysts touted the company's stock which reached a record $45 a share. However, the rebound was short-lived. By 1987 the company was once again in the red, and then, after two marginally profitable years, Allied was faced with a $10 million loss in 1990.

Ironically, Allied's troubles came at a time when the agricultural industry was finally recovering from the decade-long slump. While Allied's Bush Hog and Kewanee divisions were benefitting from the rebound, the company's White Farm division, which produced higher-priced tractors, was still struggling. White Farm's capital needs and expensive inventory carry-overs wound up costing Allied much-needed cash and eating up credit. Allied's debt rose to a crushing 112 percent of equity, and by 1990 the company's income from operations couldn't even cover interest expenses. "We leveraged the company way up," chief financial officer Kenneth Light told the Wall Street Corporate Reporter. "It led to our running out of cash and lines of credit. This was during a time when the banks did not have a good sense of humor about those kinds of businesses."

Although Allied was "very close to filing Chapter 11 on several occasions," according to Light, the company managed to avoid bankruptcy by negotiating "a very serious restructuring" with its creditors. Allied agreed to sell most of its subsidiaries and to pledge substantially all of its assets as security for outstanding loans. Over the course of the next two years Allied sold or liquidated all but three of its businesses. Among the discontinued divisions was Richard Brothers Die Works, the last remaining vestige of the original Allied companies. By 1995 Allied retained only Bush Hog, manufacturing short-line implements for farming and land maintenance; Verson, producing metal forming presses; and Coz, a developer of thermoplastic resins and additives.

With about $230 million generated by the closings applied to the elimination of long-term debt, Allied was able to avoid bankruptcy and to resume the process of growing the company's remaining businesses. By 1993 a scaled-down Allied was once again making a modest profit, and by 1996 the company recorded net income of $19 million on $274 million sales. In a 1996 interview with the Wall Street Corporate Reporter a chastened but still optimistic Richard Drexler talked about the future of his company: "I do not have a specific sales number in mind, such as a billion dollars. I do not have a vision where I want to have 30 divisions. I think my vision is to be able to say that we are the market and technological leaders in all the businesses that we are in."